Tuesday, February 10, 2009

The Beardstown Ladies

Individuals are always looking for the best places to store their savings in order to achieve the best long-term rate of return. Unfortunately, the path to finding the "Next Buffett" is littered with false promises and even fraud. The exposure of the Madoff fund reminded investors that unscrupulous managers will seek to rob them (all the while lying publicly about it). But investors must also look out for managers who are actually honest, but nevertheless inept! Consider the Beardstown Ladies.

In 1983, a group of 13 old ladies formed an investment club in order to help manage their savings. Their 'success' led to the publishing of a best-seller "The Beardstown Ladies' Common Sense Investing Guide" in 1994 where it was claimed that investment returns had approximated 23% per annum since inception!

In 1998, however, third-party auditor Price Waterhouse found the return over that period was actually 9.1%, well below the 14.7% posted by the S&P 500 during the same time period! No fraud had appeared to take place; the ladies had simply erred in counting returns by including new money invested as investment income! The group was exposed for what it was: just one of the many investment clubs around that had underperformed the market.

The ladies certainly took advantage of their brief moment as star investors in the public eye, however. The ladies made a video, authored five books, and went traveling on a media bonanza, drawing the interest of investors near and far. But investors looking to learn how to improve their returns were unfortunately misled. For more on the details of how the truth was uncovered, see this article.

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